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Prudence Inheritance Bond
Customer Guide
Prudence Inheritance Bond
Inheritance tax might be called “the voluntary tax” as there is much that you can do
to reduce it or not pay it at all.
Inheritance Tax – a tax on personal wealth
Inheritance Tax is paid if a person’s estate (their property, money
and possessions) is worth more than a certain amount when they
die. This is called the ‘Inheritance Tax threshold’ or 'Nil Rate Band'.
The Inheritance Tax threshold is expected to remain unchanged at
£325,000 until April 2021.
In addition, the Government introduced an additional 'main
residence nil rate band' for the 2017/2018 tax year starting at
£100,000. This will increase to £175,000 in the 2020/2021 tax year.
This will be available if the owner dies on or after 6 April 2017 and
the deceased's residential property, which has been his or her
residence, and is included in the estate, is left to one or more direct
descendants on death.
Rules will also be introduced so that the main residence nil-rate
band will be available when a person downsizes or ceases to own a
home on or after 8 July 2015 and assets of an equivalent value, up
to the value of the additional nil-rate band, are passed on death to
direct descendants.
Where the value of the deceased’s estate exceeds £2m (after
deducting liabilities but before reliefs and exemptions) the main
residence nil rate band will be reduced by £1 for every £2 excess
value. The £2m threshold and the main residence nil rate band
are due to increase in line with the Consumer Price Index from
6 April 2021.
02 Prudence Inheritance Bond
Any main residence nil rate band that is not used on first death will
be able to be transferred to a surviving spouse or civil partner. The
unused proportion will be applied to uplift the survivor’s main
residence nil rate band entitlement on second death.
Any portion of the main inheritance tax allowance can be
transferred to a surviving spouse or civil partner on your death.
This means that the nil rate band that is available when the surviving
spouse or civil partner dies will be increased by the proportion of
the nil rate band that was unused.
If your estate is liable to IHT it will be over and above all of the
income tax that you will have paid throughout your life. With the
rate of IHT set at a flat 40% of the amount of your estate valued at
over your personal IHT allowance it could make you the equivalent
of a higher rate income tax payer when you die.
A tax you can legally plan to not pay
Accountants have been known to call inheritance tax “the
voluntary tax” as there is much that you can do to reduce it.
By following a few simple steps and a little planning you could
avoid HM Revenue & Customs (HMRC) potentially becoming
your largest single beneficiary.
The tax information in this guide is based on Prudential's
understanding of taxation rules and regulations, all of which may
change without notice. The tax impact will depend on your
individual circumstances.
What inheritance tax might I have to pay on my estate?
Example
Under current legislation, you don’t pay inheritance tax to
HMRC on the first £325,000 of your estate – but anything
over this amount will be subject to IHT at 40%. IHT can also
apply to certain gifts you’ve made during your lifetime.
This is just an example designed to represent a typical situation, and
does not relate to any particular individual. You should not look upon
this as financial advice or a recommendation of a particular course of
action. You should consider your own circumstances fully, and may
wish to consult a Financial Adviser to help you make a decision.
When you die, IHT will need to be paid on the value of your
estate and on certain lifetime gifts you’ve made in the seven
years prior to your death. Your estate includes:
> everything owned in your name;
> your share of anything you own jointly with someone else;
> any gifts from which you keep back some benefit – such as a
home you live in and maintain, even though you’ve given it to
someone else;
Assets
The family home
Contents and personal possessions
Bank/building society accounts
Savings plan
Investments
Non-exempt gifts made in last 7 years
> any assets held in trust from which you might get some personal
benefit – such as an income. This can include bank accounts,
shares and land & buildings such as a house.
Some gifts are exempt, such as wedding gifts of up to £5,000 to
each of your children, other gifts of up to a value of £3,000 each tax
year and maintenance payments. There are others; your adviser will
be able to go through these with you.
Some transfers on death may also be exempt from IHT such as
transfers of assets between a husband and wife or civil partners.
As mentioned earlier, it is possible to transfer any unused
percentage of the IHT nil rate band from a deceased spouse or
civil partner to the surviving spouse or civil partner. However it is
important not to ignore IHT by planning to give or leave everything
to your spouse or civil partner as your assets may increase by more
than the increases in the IHT tax band.
£267,000
£63,000
£60,000
£30,000
£105,000
£10,000
£535,000
Liabilities
Outstanding mortgage
Outstanding income tax
Value of estate for IHT calculation
£30,000
£5,000
£35,000
£500,000
Less the residence nil rate band
Remaining value
Less nil rate band
Balance on which IHT is due
IHT payable on £75,000 at 40%
£100,000
£400,000
£325,000
£75,000
£30,000
IHT liability
£30,000
Prudence Inheritance Bond 03
The Elements of a IHT bond
Inheritance tax planning is not just about planning to protect your lifetime’s accumulated wealth from the taxman. It’s also about making
long-term decisions about your finances and your family – and how you want to arrange any transfer of your assets.
To do this effectively you must consider a few basic things:
> your own financial security,
> the future needs of your family, and
> the value of your assets now and how this could change in time.
An IHT bond will help do this.
Your needs
Good IHT planning
Essential requirements:
> adequate funds to cover your living expenses
Ongoing flexible payments
Desirable requirements:
> funds protected against inflation
> tax-efficiency
Essential requirements:
> gift to reduce the IHT bill on your estate
Capital for your beneficiaries
Desirable requirements:
> immediate reduction in your IHT liability
> prospects for capital growth to help protect capital against inflation
How can Prudence Inheritance Bond help?
We’ve designed the Prudence Inheritance Bond as an investment bond that can help you reduce your inheritance tax liability, whilst
providing you with regular payments. It offers a combination of benefits.
Access to regular payments is one of the major benefits of using the Prudence Inheritance Bond to help in your IHT planning. Traditional
IHT planning makes use of gifts to remove money from your estate during your lifetime and so reduce the value of your estate on death.
But using traditional IHT planning means that you are unable to retain any benefit such as regular payments from your gift.
The bond also offers the potential for growth in its capital value – outside your estate.
Prudence Inheritance Bond is an investment-linked bond. This means that your investment buys units in the underlying funds whose values
rise and fall with investment conditions. The value of an investment can go down as well as up and is not guaranteed. You could get back
less than you have paid in. More information on distributions can be found on page 6.
04 Prudence Inheritance Bond
Prudence Inheritance Bond
We’ve designed a product specifically for efficient inheritance tax planning –
Prudence Inheritance Bond – to help you meet all these IHT planning needs.
> It’s an IHT planning package, which could be suitable for
basic, higher rate and additional rate taxpayers.
> It can reduce the value of your estate for IHT purposes
immediately. The amount of any reduction will depend on
your age and your state of health at the time the bond is
taken out.
> You can take natural income payments from the bond
throughout your lifetime.
> Any natural income taken does not erode the capital available
for your beneficiaries.
> The bond offers the prospect of capital growth on your
investment, to try to help protect the sum payable to your
beneficiaries against inflation.
> You have a choice of trusts: absolute or discretionary.
You will find more information on page 6 about the income that can
be taken from the bond.
Prudence Inheritance Bond works cleverly by combining two
types of plan with a Discounted Gift Trust, in order to provide
flexible payments for you, whilst providing the opportunity for
you to gift capital to beneficiaries and thereby the potential to
reduce the value of your estate for IHT purposes.
Whilst the underlying processes may appear complicated, taking
out your Prudence Inheritance Bond is fairly simple, with minimal
forms to complete and no requirement for a medical examination
(although we will always request a general practitioner's report).
Prudence Inheritance Bond consists of two single premium
investment-linked plans – a Whole of Life Plan written under trust
and an Endowment Plan. Working together, this combination lets
you pass on wealth to your chosen beneficiaries by gifting capital
(under the Whole of Life Plan) while you retain regular payments
and maturity benefits (from the Endowment Plan).
The value of your plan may go down as well as up and there could
be times when your beneficiaries might not get back the full amount
of your investment.
Information about the available investment funds, their aims,
risk profiles and charges can be found in the Fund Guide,
available from your adviser.
Prudence Inheritance Bond 05
How it works
You invest a minimum of £15,000 into your bond which is split
into 2 parts.
One part holds the capital which you have gifted, and is held
in trust for your beneficiaries.
The other part holds the income units for you.
Prudence Inheritance Bond
Capital Fund
Income Fund
Written under trust for
your beneficiaries
Distributions paid to
you or redirected
Capital Fund
Part of your investment buys Capital Units. This forms the Whole
of Life plan and is held in trust for your beneficiaries. Since it is a
Whole of Life plan, it is not possible to cash this in. It will only pay
out on death, and has no value at any other time.
Income Fund
Part of your investment buys income units. This is the endowment
plan and provides you with access to any returns earned on the
underlying investments which can be paid out to you as regular
distributions (in this document we refer to this as natural income).
As the regular distributions consist only of the returns from the
underlying investments this means they do not erode the capital of
the premium invested in the endowment plan or the capital held in
trust for the beneficiaries under the Whole of Life plan. Currently
you can receive regular distributions totalling no more than an
amount equal to 5% of the investment into the Endowment plan,
each year without creating an immediate tax bill. If you don’t use
any or all of this tax deferred allowance in any year, the unused
Distribution options
portion can be carried forward to future years until you have
received an amount equal to 100% of your original investment into
your endowment plan.
When are distributions paid?
Distributions are paid every three months on 1 March, 1 June,
1 September and 1 December. We issue payments at the start of
the month but it may take a few days for the money to reach your
bank account.
You can choose to take regular distributions in full, but if you are a
higher rate or additional rate taxpayer, any distributions over your
accumulated tax-deferred allowance may be liable to income tax.
Any excess can affect your entitlement to income tax allowances
and certain tax credits.
You can therefore choose to cap your distributions at 5% a year and
redirect any amount over this into your choice of up to 3 of our
investment-linked funds.
If you prefer, you can redirect all distributions into your choice of up
to 3 of our investment-linked funds which are managed by some of
the UK’s leading investment managers.
You may wish to do this if, for example, you don’t have immediate
need of regular payments. You can take regular or one-off
withdrawals from any distributions previously re-invested.
If you decide to redirect distributions, any future withdrawals may
be offset against your unused 5% tax deferred allowances before
any immediate income tax is due.
The value of the Endowment Plan at your death will be part of your
estate for inheritance tax purposes.
If you are a basic rate taxpayer and remain so, there will not be any
income tax liability on this plan.
If you are a higher rate or additional rate taxpayer, then there may
be a liability if the payments you take are in excess of the tax
deferred allowance, or when the endowment plan ends either
through maturity or on death.
Take full distribution payments. These are paid every three months on
1 March, 1 June, 1 September and 1 December.
Distributions capped at 5% a year and redirect balance.
Redirect full distribution payments
> make one off withdrawals
06 Prudence Inheritance Bond
> take regular withdrawals
Calculating the discounted value
What benefits are normally paid when I die?
Because you are entitled to payments from your bond, the value of
your initial gift may be discounted for inheritance tax purposes. The
way you make a gift is by way of a trust. The discounted value takes
into account the payments you could expect to receive during the
rest of your lifetime. This means that the value of the gift you made
could be reduced by the discount, which reduces the amount
potentially liable to IHT.
Payable to your beneficiaries:
This will depend on a variety of factors, such as your age and your
state of health. The longer your life expectancy, the more payments
you could expect to get, so the discounted value is likely to be less.
On the other hand, if you are in poor health at the start, the value
may not be discounted by very much and there could even be no
discount at all.
We will obtain a General Practitioner's Report (GR) before finalising
your application. This will allow us to assess your health and be able
to provide an estimate of the discount.
You will find more information about Trusts on pages 8 and 9.
> 100% of the value of units in the Prudence Inheritance Bond
Capital Fund.
Payable to your estate:
> 100% of the value of units in the Prudence Inheritance
Bond Income Fund (distributions arising in the fund since the
last payment),
> plus the value of any redirected distributions,
> plus £100.
What benefits are paid on maturity?
Your Endowment Plan will mature if you survive to the anniversary
of your bond after your 105th birthday (of the younger life in a joint
life bond). Your three monthly distribution payments will cease
when the Endowment Plan matures.
At this point we’d pay to you:
> an amount equal to 100% of the value of units in the Prudence
Inheritance Bond Capital Fund,
> plus 100% of the value of units in the Prudence Inheritance
Bond Income Fund,
> plus the value of any redirected distributions.
The Whole of Life Plan would stay in force when the Endowment
Plan matures. This means that if you die after your Endowment Plan
has matured we’ll pay to your beneficiaries the value of units in the
Prudence Inheritance Bond Capital Fund.
Prudence Inheritance Bond 07
Choice of trust
Prudence Inheritance Bond offers you a choice of trust – absolute
or discretionary – so you can decide which better suits your needs.
Absolute trust
With the absolute trust, you must select both the beneficiaries and
their share of the trust fund at the time you set up the trust.
The important point to remember about an absolute trust is that
you cannot change the beneficiaries or their share of the trust fund
once the trust has been set up.
If you are sure of how you want the trust assets to be distributed,
this could be the appropriate choice for you.
All capital growth on the trust investment will be immediately
outside your estate. The trust itself will not be subject to any
periodic or exit inheritance tax charges, although each beneficiary's
share of the trust fund will be treated as forming part of their estate.
The bond cannot be cashed-in during your lifetime to pay any tax
charges that may arise. With an absolute trust, the beneficiaries
have the right to demand access to the trust assets at any time after
they reach the age of majority. In practice, however, the whole of
life policy cannot be cashed-in during your lifetime, whether in trust
or not, and neither you nor the trustees are obliged to make any
other payments to beneficiaries.
Currently, details of an absolute trust do not need to be reported
to HMRC.
Inheritance tax – survival for seven years
The gift you make into the trust is called a potentially exempt
transfer (PET). If you survive for seven years after making the gift it
becomes an exempt transfer. This means that the whole of the trust
fund, including any capital growth, will be free of inheritance tax at
your death.
Inheritance tax – death within seven years
If you die within seven years of taking out your Prudence
Inheritance Bond, your gift becomes a chargeable transfer, which
means that there may be an inheritance tax liability. However, this
will normally be less than if you hadn’t set up a trust, because the
value of the gift is discounted.
Discretionary trust
A discretionary trust allows the trustees to alter the beneficiaries of
the trust or their share of it. So if you think this might be necessary
in future, this could be your preferred option.
However, depending on the amount you put into the trust, there
may be inheritance tax charges during your lifetime as well as at
your death. These are explained in the next two sections. There are
also requirements to provide details of the trust to HMRC at
specified times.
Inheritance tax – during your lifetime
There will be an immediate tax charge if the value of your gift into
the trust, together with any other chargeable gifts you have
made in the previous seven years, is more than the inheritance tax
threshold (£325,000 and fixed at this level until April 2021).
This charge is 20% of the amount above the threshold.
Joint trusts
Both absolute and discretionary trusts can be set up by a single
settlor or joint settlors. For tax purposes, a joint trust arrangement
is treated as if it were two separate single trusts.
However, for the purposes of the discounted value, we will provide
figures based on joint settlors, but with reference to each
individual's age and health.
Where there are joint settlors, on the first death, the endowment
plan passes to the surviving settlor. As a result, only spouses and
civil partners should set up a Prudence Inheritance Bond on
a joint settlor basis.
08 Prudence Inheritance Bond
There may also be a periodic charge every 10 years. This will be a
maximum of 6% of the value of the trust fund, but is likely to be less
in many cases. If the trust fund is worth less than the inheritance tax
threshold at that time, and you hadn’t made any other chargeable
gifts in the seven years before setting up your Prudence Inheritance
Bond, the periodic charge would be zero.
Both the immediate and the periodic charges will be based on
the “calculated” (discounted) value of the trust fund.
You should note that the bond cannot be cashed-in during your
lifetime, so if any tax charges arise they would have to be met
from elsewhere.
The value of the trust fund is not included within the estates
of your beneficiaries.
Inheritance tax – on death
If you die within seven years of setting up your trust, the immediate
tax charge will be recalculated using the full inheritance tax rate of
40% and taking certain other factors into account. There may then
be an additional tax charge if the amount due is more than was
already paid.
Inheritance tax – exit charges
When benefits are paid out of the trust to your beneficiaries
(which will generally be after your death, when the Whole of Life
Plan pays out), there may be an exit charge. This is based on the
previous periodic charge (or the charge when the trust was set up,
if there hasn't yet been a periodic charge), but takes into account
the inheritance tax threshold at the time. If the previous charge was
nil, the exit charge will also be nil, even if the value of the trust fund
has grown.
Prudence Inheritance Bond 09
Adviser Charging
Adviser Charges
Ongoing Adviser Charge
You agree with your Adviser how they will be paid for the advice
they provide. You can choose to pay your Adviser directly or you
may ask us to deduct Adviser Charges to pay your Adviser, or a
combination of both. If you have instructed us to deduct Adviser
Charges, full details will be shown on your personal illustration.
There are different types of
You may ask us to deduct Ongoing Adviser Charges from your
Bond to pay for any ongoing advice. These can be specified as a
percentage of your endowment premium or as monetary amount –
it cannot be a combination. The charge will be taken quarterly from
the natural income produced by the Bond, before this is paid to you
or redirected as per your instructions. Ongoing Adviser Charges
will be treated as withdrawals and will count towards your 5% tax
deferred allowance.
Adviser Charges:
> Set-up Adviser Charges
> Ongoing Adviser Charges
Your Adviser can provide further details on these options.
Set-up Adviser Charge
You may ask us to deduct a Set-up Adviser Charge and pay it to
your Adviser at the time your Bond is taken out. The Set-up Adviser
Charge will be deducted from your payment before the premium is
invested. For example if you have £20,000 to invest but you agree a
Set-up Adviser Charge of £1,000, your Premium will be £19,000.
Prudential will pay these charges to your Adviser and full details
will be shown on your personal illustration.
Ongoing Adviser Charges can be started, stopped or amended
at any time by sending us written notification.
As Ongoing Adviser Charges will be deducted from the Natural
Income held in the Endowment Plan, we can only pay Adviser
Charges in respect of advice given to the settlor. This feature
cannot be used to pay for advice given to the trustees.
Maximum Ongoing Adviser Charges
There are maximum limits applying to the amount of Adviser
Charges that can be deducted from your Bond – please speak to
your Financial Adviser.
10 Prudence Inheritance Bond
Important information
In addition to this brochure, your Financial Adviser can provide
you with more detail about the Prudence Inheritance Bond as well
as other information.
> The Key Features booklet lays out all of the product’s essential
features – what the bond does and doesn’t do, what the
charges are, and everything else you should be aware of.
> Your Financial Adviser also holds other helpful guides from
Prudential, on subjects such as the taxation of bonds.
Your Financial Adviser will give you a personal illustration showing
how Prudence Inheritance Bond could work for you, together
with the booklet describing the Key Features of the bond.
Full terms and conditions of the Prudence Inheritance Bond
are available from your Financial Adviser.
"Prudential" is a trading name of The Prudential Assurance Company Limited, which is registered in England and Wales. This name is also used by other companies within
the Prudential Group. Registered office at Laurence Pountney Hill, London EC4R 0HH. Registered number 15454. Authorised by the Prudential Regulation Authority
and regulated by the Financial Conduct Authority and the Prudential Regulation Authority.
IHTB10021 04/2017
www.pru.co.uk